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Kyle Bass Third Quarter Letter: Imminent Defaults

December 01, 2011 | About:
gurufocus

gurufocus

371 followers
Kyle Bass of Hayman Capitalis the latest we have added to our List of Gurus. Click on his name to check out his latest picks.

Kyle Bass runs a related concentrated portfolio. Owns a lot of index calls and puts. A Macro investor.

This is his third quarter letter.

Hayman_Nov2011

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.3/5 (16 votes)

Comments

superguru
Superguru - 3 years ago
what does it all mean in terms of investment allocation and strategy?
Reddzinn7
Reddzinn7 premium member - 3 years ago
It means have few equities because its going to be a bumpy ride to the bottom.

That being said, I do have one question. In the section Pre- or Post-, Kyle says that the clear decision is post crisis to print money. I do not believe the answer is so clear. Yes, from a purely logical standpoint, post is the right decision, but when have elected officials done the purely logical thing instead of the "easier" short-term option? It seems to me, that EU officials will print now and deal with inflation rather than have everything blow-up and then pick up the pieces. Inflation is manageable by raising rates, but at least it won't cause immediate massive demonstrations and anarchy. Its the path of least resistance, and that the path politicians choose, further kicking the can down the road. If this is the scenario that plays out, is a rally in the offing? Possibly so, as "immediate disaster" is avoided........

However, this says nothing about Japan, which is the real 900lb gorilla that waiting in the corner, ready to pounce on the market. That's my biggest concern, the one no one is really talking about.
donnelbr
Donnelbr - 3 years ago


It means it's time to take some firearms training.

...only half joking. Given it seems we're past the point of a soft landing for this bubble, there is a serious risk of a financial system failure. In order to prevent a failure, governments will need to make money appear out of thin air (print it), hence large inflationary pressures.

1.) if you own a house and have a mortgage, refinance now (rates are still low), and most importantly make sure you're on a fixed rate mortgate.

2.) get out of equities and bonds.

3.) accounts at banks for less than $250k (FDIC insured) should be fine for now.

4.) move money into gold and silver (not right away, as liquidations and short term dollar strength will put pressure on these during a financial meltdown).

5.) build a survival camp in the woods, stock it with guns and ammo, food, water, livestock, seeds, solar panels, etc.

If you want to make some money off the current circumstances, take some risk. My plan is to short the Euro. I've put on a long 1.25 put, short 1.40 call risk reversal in March. If the Europeans can hold it together until then, I'll just roll the position another three months. Once the Euro falls apart, I'll do the same thing to the Yen, with the proceeds from the Euro trade. Also, after the Euro falls apart, I'll start buying physical gold and silver, which I will put in a safe deposit box.

Now, this doesn't mitigate the risk that the financial institutions at which I hold trading accounts fail. As such, I've opened a Treasury Direct account in order to quickly get money out of financial institutions and into T-Bills held in a U.S. Gov't account. Note, I will avoid any US debt instrument with over a few months of maturity.

As the T-bills mature, I will continue to buy gold and silver. When the crisis has calmed down there will probably be some good opportunities in equity markets again.

Worst case, if there is a systematic banking failure, there will be a premium on guns, and land in the woods, as there will certainly be civil unrest.
paulwitt
Paulwitt - 3 years ago


what does it all mean in terms of investment allocation and strategy?

Canned food, water, pepper spray, ill-tempered dog, 70% gold - and 30% in the S&P 500 index in case I survive.

superguru
Superguru - 3 years ago
donnelbr and Paulwitt - That answers my question well. Thank you.

What do you guys think is probability of this scenario coming true for the countries Kyle mentioned - PIIGSBF and Japan.

Others like US, Canada, Australia, Germany and Emerging markets will be impacted really bad but should come back stronger afterwards.

Morrissett
Morrissett - 3 years ago
From Kyle's mouth: the fund is roughly 90% short term US bank loans, corporate debt, floating rate notes, mortgage bonds (paper backed by foreclose-able assets) and approx 10% rate and default swaps (tail hedge stuff). Equities are a small sleeve.

He's of little use to this website because GF.com is all equity focused.

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